Give vendor due diligence its due.
A year ago, my first column for HRO Today discussed the increase in corporate mergers and acquisitions. The trend we saw developing at that time has continued unabated.
When two companies merge, HR and benefit service delivery functions—including any vendors of outsourced administration—are affected as well. Often a merger —especially one involving restructuring and a RIF—means a temporary but sharp increase in transactional activity and tactical and strategic decision regarding new providers that which will affect ongoing service delivery. A merger provides an opportunity to evaluate existing HR and benefit service delivery and to make desired changes or improvements.
What practical issues come into play when selecting the ongoing vendors? For example, if the acquirer is the larger entity and its benefit programs and pay systems will continue with little change, then continuing its existing relationships may be most reasonable. Merging organizations should apply the same due diligence to vendor selection decisions that they used before the merger.
The following constitutes an outline of a due diligence vendor review.
• Prepare an Inventory. Identify all internal and external vendors serving both companies and list:
• The basic facts about each vendor including its size and operating locations;
• Services provided, including details about each vendor’s (and its subcontractor’s) functions and activities;
• The risks associated with each vendor’s services (such as the number of employees affected) and the complexity of the services provided;
• The existing links between vendors and the companies’ internal systems and processes;
• Contract terms including the period covered, terms for contract changes, service level metrics, and cost of services in a format that allows apples-to-apples comparisons;
• The technologies used to support administrative processing and deliver services to employees;
• Any known service delivery or compliance issues.
• Evaluate Service Satisfaction using both quantitative and qualitative assessments of:
• The provider’s historical performance against stated metrics and user feedback;
• Performance based on feedback from key company contacts within various functions such as HR, finance, and line management; and
• A vendor’s marketplace leadership and resources required to meet future service levels.
• Evaluate Risk and Performance Against Industry Standards. Following the merger, the requirements and expectations of the resulting company may be quite different than those which existed previously. For this reason, the company should:
• Conduct risk assessments of operational, IT, and financial controls, evaluating each provider’s service quality and security level using tools such as SAS 70 reports and/or third-party certifications, plus on-site reviews of high-priority vendors;
• Conduct appropriate audits to identify any HR, benefits, or compensation program compliance issues within current vendor processes;
• Evaluate the current levels of service against industry best practice benchmarks;
• Determine savings possibilities such as negotiated cost or service level improvements resulting from the merged entity’s increased purchasing power or new competitive advantage. Evaluate the provider’s technology platforms for data security, transaction processing, and the ability to reduce cost and improve service quality.
• Evaluate the vendor’s capacity to deliver contracted services and their commitment to enhancing their capabilities and managing operational expenses.
These due-diligence principles accomplish several goals. They allow the integration team to prioritize vendors for review and integration based on their importance to the company, to develop a clear understanding of the service levels expected, and to compare each vendor by delivery, cost and provision of state-of-the-art services. Documenting vendor interdependency allows the integration team to understand the potential domino effect of changes under consideration. The choice process demonstrates selected vendors’ ability to meet corporate strategic goals.
Once the integration team has made selections, it can document and communicate its rationale for each decision to stakeholders and vendors and use the compiled information to monitor the selected vendor’s ongoing performance. Finally, the due diligence review will quantify the full return on investment: the cost savings from combining operations and the resulting improvement in quality and service.